A lot can happen over a weekend, including Sunday’s provocative nuclear test by North Korea. Reports that the country is now preparing to launch a new ballistic missile threaten to keep the world on edge this week and beyond.
The initial reaction in stock markets across Asia and Europe: sell, which is the standard game plan of late when North Korea injects itself into global headlines. The surprise factor, however, is fading, raising the question: Will investors learn to live with the Kim Jong-Un’s menacing behavior?
“Like a bad horror movie, the North Korea saga intersperses moments of calm, with occasional action to jolt you out of your chair,” observes Rob Carnell, ING’s head of Asian research. “But we have been here now many, many times. Unless this is the precursor to US military action, which we doubt, then in a little over a day or two, tensions will calm again, making this a good buying opportunity for investors with a strong enough nerve.”
From the perspective of South Korea, it’s just another day, says a reporter who lives in Seoul. Asked how the city’s reacting to North Korea’s latest nuclear test, Choe Sang-Hun, The New York Times’ bureau chief in the city, says:
Oh, people here are very calm and you know, you don’t have a crisis here. If you stop people here and ask questions about North Korea, yes, they will talk about those nuclear weapons and they will talk about the threat from North Korean missiles. But if you walk around downtown Seoul it’s business as usual. Life goes on and there’s no sense of panic or no sense of a crisis at all.
Calm? No sense of panic? But isn’t the world on the edge of war in Asia? It appears so, but South Korea has learned to live with the risk and there are signs that the rest of the world may be less inclined to assume the worst. Although there’s red ink this morning (as of ~8:00 am New York time), the declines in several key indexes are modest so far.
“Expect some short-term risk-aversion trades,” Citigroup economists advised in a note to clients. “But such market moves tend to be short-lived, as typically tensions defuse quickly. So unless the global response to this test raises the probability of a military strike or North Korean regime collapse (both unlikely), this time may play out similarly.”
The bigger threat for investors may be bound up with how President Trump reacts. US military options are a possibility, of course, but given the carnage that would likely follow – for Seoul in particular — as North Korea responds suggests that the White House would look elsewhere.
“We always have military options, but they’re very ugly,” says Mark Hertling, a retired US Army general.
Perhaps that’s why Trump on Sunday hinted at the possibility of imposing new trade barriers on countries that do business with the rogue nation. That’s a thinly veiled economic threat to China, which is considered North Korea’s economic lifeline.
“If you really ratchet up the sanctions against China’s largest banks, that could have systemic consequences for the global economy and could really hurt the American economy as well as the North Korean economy,” says Doug Paal, vice president for studies at the Carnegie Endowment for International Peace and a former staff member at the National Security Council.
The potential fallout for risky assets, in other words, is quite real, although not necessarily for reasons due to a conventional war.
In any case, the saber rattling isn’t going away. The world is a dangerous place and it may become more so in the future. The question is whether the crowd will learn to routinely price in a risk that’s likely to remain front and center for years (decades?) to come?